Acquisition of Hutchison Essar (India) by Vodafone (UK): A Case in International Taxation of Indirect Transfer of Shares

In May 2007, Vodafone Plc. (U.K.), through its fully-owned subsidiary in the Netherlands acquired for $11.1 billion a majority interest in Hutchison Essar Limited (India). For failing to withhold taxes on capital gains, the Indian Revenue Service has assessed a total of $5 billion of taxes and penalties on Vodafone. Whether India’s position to tax indirect transfer of shares between two non-Indian entities is consistent with the practices of OECD countries such as the U.S. and whether such tax regulations help or hinder economic competitiveness of emerging countries are hotly debated topics, given the increasing pace of globalization and cross-border movement of capital and human resources. The Vodafone case is perhaps the first in the world where the principles relating to taxation of indirect transfer of shares were litigated before a country’s highest judicial court. The case helps students to (a) research tax literature in the U.S. and a foreign country and apply it to a real-world context, (b) understand a complex foreign acquisition transaction and its tax ramifications, (c) determine whether a similar transaction would be taxable in the U.S. and other OECD countries, given the provisions of the U.S. Model Tax Treaty and the OECD Model Tax Convention, and (d) evaluate the pros and cons of taxing transfer of shares between two foreign entities for the transfer of an asset situated in a given country, from the perspective of tax authorities in that country.